In re Sanders, Bankruptcy No. ED 84-90M
| Decision Date | 21 January 1987 |
| Docket Number | Bankruptcy No. ED 84-90M,AP No. 85-185M. |
| Citation | 75 BR 746 |
| Parties | In re John SANDERS and Mary Ellen Sanders, Debtors. Mary Ellen SANDERS, Plaintiff, v. STEPHENS SECURITY BANK, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Arkansas |
Isaac A. Scott, Jr., Little Rock, Ark., for debtors.
Joseph Hickey, El Dorado, Ark., for plaintiff.
Allen P. Roberts, Camden, Ark., for defendant.
On November 1, 1984, John and Mary Ellen Sanders filed a joint voluntary petition for relief under the provisions of chapter 11. Because of the potential conflict of interest, separate counsel was employed by each of the debtors-in-possession. On May 6, 1985, Mrs. Sanders filed this complaint to set aside Stephens Security Bank's (Stephens) claim of lien on a certificate of deposit and to determine that Mrs. Sanders' liability on a note had been discharged.
Other actions were filed by Mrs. Sanders against The Merchants and Planters Bank, Camden, Arkansas, AP 85-183M, AP 85-188M and AP 85-189M, and the First National Bank of Camden, Arkansas, (FNB), AP 85-184M, AP 85-186M and AP 85-187M. All of these adversary proceedings were consolidated for trial by agreement. A separate memorandum opinion will be issued in each case.
The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B) and (K). The Court has jurisdiction to enter a final judgment in the case. The following shall constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule of Procedure 7052.
Mrs. Sanders was born and raised in Camden. She lived and worked in New Orleans for about six years after graduating from college but has not worked from the time of her marriage to Mr. Sanders in 1968 until after the petition was filed. Mr. and Mrs. Sanders moved to Camden in 1969.
Mrs. Sanders inherited as her separate property substantial amounts of property from her father's estate. She also acquired separate property from her mother.
On October 24, 1983, Mr. and Mrs. Sanders executed a promissory note to Stephens in the principal sum of $35,000.00. Interest accrued on the unpaid principal balance at the rate of 13.5% per annum. The note was due to be repaid in one installment consisting of principal and all accrued interest on January 23, 1984. The loan proceeds were delivered to Mr. Sanders for use in the operation of his business of constructing and operating a motel in Camden, Arkansas. Mrs. Sanders received none of the proceeds from the loan.
A $25,000.00 certificate of deposit was purchased in Mrs. Sanders' name at FNB on October 3, 1983. The maturity date was 182 days after October 3, 1983. The certificate of deposit was purchased with her separate funds. In order to secure the repayment of the above-stated indebtedness of Mr. Sanders to FNB, Mrs. Sanders assigned the certificate of deposit to Stephens as collateral on October 26, 1983. The assignment document was executed by both Mr. and Mrs. Sanders. Possession of the certificate of deposit was transferred by Mrs. Sanders to Stephens. When the FNB certificate of deposit matured, Stephens cashed it and purchased a new $25,000.00 certificate of deposit No. 5235 on April 18, 1984, at Stephens in Mrs. Sanders' name.
After the October 24, 1983, note became due, Mr. Sanders paid the interest current and executed an extension agreement which extended the note due date to April 22, 1984. On May 1, 1984, Mr. Sanders paid interest current and executed another extension agreement which extended the due date to July 22, 1984. In addition, the interest rate was increased to 14% per annum. On October 19, 1984, Mr. Sanders paid interest current and signed an extension agreement which extended the due date of the note to April 22, 1985. Mrs. Sanders never signed an extension agreement nor was she ever advised by her husband or Stephens that the due date of the note was being extended. Mrs. Sanders testified that she never gave her consent to the extensions and that she assumed this obligation was being satisfied from the operation of the motel in Camden.
The assignment document which assigned the original certificate of deposit reflected that it was "security for Thirty-five thousand and no/00" and that "this assignment shall be a continuing one and shall be effective for any renewals of above loan until same is entirely paid."
MRS. SANDERS' STATUS: MAKER OR ACCOMMODATION MAKER?
Both sides have presented arguments on the issue of whether Mrs. Sanders signed the note as an accommodation maker or primary maker.
Ark.Stat.Ann. § 85-3-606(1)(a) (Add. 1961) provides as follows:
Courts which have considered the question of whether the defenses under Uniform Commercial Code § 3-606 are available only to accommodation parties are divided. Compare Federal Deposit Ins. v. Blue Rock Shopping Center, 766 F.2d 744, 749 (3rd Cir.1985) () with Bishop v. United Missouri Bank of Carthage, 647 S.W.2d 625, 629 (Mo.App. 1983) (). The Supreme Court of Arkansas has held specifically that the defenses under Ark. Stat.Ann. § 85-3-606 (Add.1961) are available to both makers and accommodation parties. Rushton v. U.M. & M. Credit Corporation, 245 Ark. 703, 434 S.W.2d 81 (1968). Regardless of Mrs. Sanders' status, under Arkansas law she is entitled to assert the defenses available pursuant to Ark.Stat.Ann. § 85-3-606 (Add.1961).
Mrs. Sanders argues that she should be released from liability on the note because the due date was extended and the interest rate raised without her knowledge or consent. If the due date of a note is extended without the consent of a party eligible to rely on U.C.C. § 3-606 that party is discharged from liability to the holder of the note. Holcomb State Bank v. Adamson, 107 Ill.App.3d 908, 63 Ill.Dec. 704, 708, 438 N.E.2d 635, 639 (1982); First Nat. Bank of Layton v. Egbert, 663 P.2d 85, 87 (Utah 1983); Varga v. Woods, 381 N.W.2d 247, 252 (S.D.1986).
The due date of the ninety-day promissory note was originally January 22, 1984, and was extended by an agreement between Mr. Sanders and Stephens as recited above.
Stephens argues that Mrs. Sanders is deemed to have given her consent to the two extensions of the due date because of a printed provision in the note which provides as follows:
EACH SIGNER LIABLE. If there is more than one person signing this note each will be jointly and individually liable for the whole obligation. Each will pay the note even if you agree with the other to renew or extend it, revise its terms or release any security. (emphasis added).
The proper interpretation of this provision is governed by Ark.Stat.Ann. § 85-3-118(f) (Add.1961). This subsection provides, in part, as follows:
Unless otherwise specified consent to extension authorizes a single extension for not longer than the original period. A consent to extension, expressed in the instrument, is binding on secondary parties and accommodation makers.
Comment 7 of the Official Comments to Ark.Stat.Ann. § 85-3-118 (Add.1961) states, in part, as follows:
Subsection (f): This provision is new. It has reference to such clauses as "The makers and indorsers of this note consent that it may be extended without notice to them." Such terms usually are inserted to obtain the consent of the indorsers and any accommodation maker to extension which might otherwise discharge them under Section 3-606 dealing with impairment of recourse or collateral. An extension in accord with these terms binds secondary parties.
The question presented is the proper interpretation of the "EACH SIGNER LIABLE" provision. There are three interpretations possible for this provision: (1) the provision cannot reasonably be construed to grant any consent to extension of the due date; (2) the provision can reasonably be construed to grant consent, but because the provision is ambiguous, Ark.Stat.Ann. § 85-3-118 (Add.1961) limits the consent to one extension; or (3) the provision can reasonably be construed to unambiguously grant consent to unlimited extensions.
The determinative language in the note is "Each will pay the note even if you agree with the other to renew or extend it." No case construing this precise language has been found. Some note provisions have been construed to constitute consent to unlimited extensions without release of the guarantor. Union Const. Co. v. Bene. Standard Mortg. Inv., 125 Ariz. 433, 610 P.2d 67, 71 (App.1980) (); Bay Nat. Bank & Trust Co. v. Mason, 349 So.2d 810, 811 (Fla.App.1977) (); Brazosport Bank of Texas v. Travis, 617 S.W.2d 729 (Tex.Civ.App.1981) (...
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